Continuing Tuesday's commentary on Paychex as a proxy for the general economy and stock market:
Money Daily may have struck the nail firmly on the head with Tuesday's outlook on Paychex's (PAYX) fiscal fourth quarter (2Q) earnings report. While the company had a small beat, reporting net income of $220.7 million, or 61 cents a share, those figures were down from $230.4 million, or 64 cents a share, in the year-earlier period.
While it may not sound like much, the decline in both revenue and EPS may have shed some significant insight on the overall outlook for July and the third quarter. Paychex deals with millions of small businesses, many likely affected by the shutdowns in April, May, and June, though that data didn't really come through their statement, partly because their quarter included results through May 31 only, leaving June an open question.
There's a strong possibility that Paychex saw more erosion in their customer base in June and that was reflected in their guidance. The company is looking for adjusted EPS to fall six to 10 percent in their fiscal 2021, which actually began June 1.
This is actually significant, and was reflected in Tuesday's trade as the company reported prior to the opening bell. At the close, Paychex was 73.94, -3.84 (-4.94%). At that price, using the last four quarters' EPS of $2.99, the P/E ratio stands at 24.72, making Paychex an overvalued stock (but, which stocks aren't these days?).
Consider the falling revenue and earnings guidance to be an early warning. If the next four quarters come in with a 10% dip in EPS - a distinct possibility - that would put the P/E ratio at an alarming 27.22 (73.94/2.70). In anticipation, the selling was vigorous, with volume close to double the average.
As a proxy for the Main Street economy - because Paychex has so many small and mid-sized business customers - this is a solid sell signal. As earnings decline, so should the share price. Using an EPS of 2.70, figure fair value to call for a P/E around 15, which would put the stock at 40.50 per share, a decline of 45.23%, in line with the general market.
Thus, Paychex is offering a window into July and the third quarter. The stock could just glide along the normal flight path with the market, though the Fed's infinite QE message is beginning to wear thin, but, if Tuesday's five percent knock on Paychex is any kind of signal, the general market may be headed for a deep dive during earnings season, and that's going to heat up significantly beginning next week.
Traders and investors are properly looking to get out of the way of any oncoming steamroller. Paychex is providing a signal to the market, overwhelming the noise from the past two months. This is very likely a tradable event, however, Money Daily is not an investment advisor and has no position in Paychex, at this time. (see full disclaimer below)
Think about it. Who is willing to pay 24 times earnings for a company like Paychex, with a customer base that may be largely going out of business presently or in the near future? A small company with most of its employees laid off or furloughed has little need for a payroll service. With little to no revenue, a company would have diminished need for a tax service like Paychex. A company that closes its doors for good would only need Paychex to do the finalizing paperwork for submission to the IRS or state tax authorities which lays ahead. Such reporting and the lack of an ongoing customer relationship may be as long as a year into the future and not show up readily on Paychex's balance sheet. Keep that in mind. This could play out quickly or be drawn out over many months, but there appears to be a clear case that Paychex's business model may be breaking down as a result of the pandemic, lockdowns, and the obvious, current recession.
Because of the type of business Paychex operates and the unique characteristics of its customer base, there could be quite a bit of downside to their operation. Further, the company may be telling the market to brace for another round of selling, to commence shortly.
Disclaimer: Information disseminated on this site should not be construed as investment advice. Downtown Magazine, Money Daily and it's owners, affiliates and/or employees are not investment advisors and do not offer specific investment advice. All investments have risk. You should consult a professional investment advisor or stock broker or use your individual judgement when making investment decisions. By reading this site, you hold harmless Downtown Magazine, Money Daily, its owners, affiliates and employees from all liability.
At the Close, Tuesday, July 7, 2020:
Dow: 25,890.18, -396.85 (-1.51%)
NASDAQ: 10,343.89, -89.76 (-0.86%)
S&P 500: 3,145.32, -34.40 (-1.08%)
NYSE: 11,990.13, -169.87 (-1.40%)
Wednesday, July 8, 2020
Tuesday, July 7, 2020
What Paychex Earnings Report Tells About The Pandemic, Lockdowns, the Future
With the second quarter closing out last week, investors look ahead to what promises to be a challenging earnings season, as April, May, and June were marked by the impact of the coronavirus and resultant government responses to containing its spread.
Stay-at-home orders, forced business shutdowns, and other social distancing recommendations during the period had an indelible impact on business globally. Especially hard-hit were small to mid-sized companies many of which contract with Paychex (PAYX) for their tax accounting and payroll administration.
Paychex (PAYX) announced its fiscal fourth quarter earnings prior to the opening bell on Tuesday, reporting net income of $220.7 million, or 61 cents a share, in their fiscal quarter ended May 31, down from $230.4 million, or 64 cents a share, in the year-earlier period.
The company was expected to report quarterly earnings at $0.60 per share, so it is technically a beat in Wall Street parlance, but the company has given some reason to pause, considering this statement by Chief Executive Martin Mucci:
The company ended the quarter with $1.0 billion in cash and $801.9 million in debt and pays an annual dividend of $2.48 (3.19% yield). Along with ongoing operations their outflows are tremendous and the accumulated debt has been growing over the past two years. While their cash to debt ratio is still positive, they may be headed for zombie territory if the companies they do business with fail to remain going concerns.
Paychex repurchased $350 million of its common stock from July 2016 through May 31, 2019, and more than $500 million prior to that. A year ago, the company announced a share repurchase program of another $400 million.
After reaching a high of 90.23 on February 20, the price of Paychex shares was cut nearly in half, hitting a low of 50.39 on March 23, as panic over the coronavirus hit Wall Street hard. Since then, share price improved to a closing price of 77.78 on Monday, July 6, though after the announcement, shares were sliding in pre-market trading.
This particular earnings report does offer some insight, even though it's backdated to May 31. Some of their business may have taken a hit in June and there may be more going forward, as there's a lag time between companies going bust and formally ending their business relationships. Paychex's fortunes may not be so rosy going forward. The company sees earnings and revenue falling in 2021, a gloomy picture for a perennial high-flier and another negative for the economy. As far as stocks - and, in particular, Paychex - are concerned, their performance will largely be the function of investor sentiment and the level of largesse bestowed upon Wall Street by the Fed in the next round of emergency financing.
Here's another somewhat frightening vision of the future: The only restaurants will be chains like Applebee's, Taco Bell, and McDonald's.
It just could go that way since most mom-and-pop individually-owned restaurants were forced to shut down during the COVID crisis and most of them don't have the financial resources to weather a shutdown for a month or longer. It's already been estimated that more than half the small, local one-location restaurants in America will be permanently out of business by September, if not sooner.
Those that are fortunate enough to stay in business will likely be burdened by loans they were forced to take on due to the government lockdowns. And, as the above-linked article suggests, the chain reaction to other businesses servicing restaurants may be even more severe, affecting delivery services, linen companies, pest-control firms, farmers, and even the local and state taxing authorities, who will take an enormous hit to revenue when hundreds or thousands of sales tax and property tax producers are no longer around.
Under this scenario, companies like Paychex, which cater to small businesses, could see dramatic declines in revenue and profits.
Elsewhere, Argentina's government representatives have apparently sweetened the deal for bond-holders in the ongoing discussions over some $65 billion in debt on which the country recently defaulted. The deadline for a formal agreement has been pushed back (again) to August 4.
Stay liquid.
At the Close, Monday, July 6, 2020:
Dow: 26,287.03, +459.67 (+1.78%)
NASDAQ: 10,433.65, +226.02 (+2.21%)
S&P 500: 3,179.72, +49.71 (+1.59%)
NYSE: 12,160.01, +168.49 (+1.41%)
Stay-at-home orders, forced business shutdowns, and other social distancing recommendations during the period had an indelible impact on business globally. Especially hard-hit were small to mid-sized companies many of which contract with Paychex (PAYX) for their tax accounting and payroll administration.
Paychex (PAYX) announced its fiscal fourth quarter earnings prior to the opening bell on Tuesday, reporting net income of $220.7 million, or 61 cents a share, in their fiscal quarter ended May 31, down from $230.4 million, or 64 cents a share, in the year-earlier period.
The company was expected to report quarterly earnings at $0.60 per share, so it is technically a beat in Wall Street parlance, but the company has given some reason to pause, considering this statement by Chief Executive Martin Mucci:
"We currently anticipate that cash, restricted cash, and total corporate investments as of May 31, 2020, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future."
The company ended the quarter with $1.0 billion in cash and $801.9 million in debt and pays an annual dividend of $2.48 (3.19% yield). Along with ongoing operations their outflows are tremendous and the accumulated debt has been growing over the past two years. While their cash to debt ratio is still positive, they may be headed for zombie territory if the companies they do business with fail to remain going concerns.
Paychex repurchased $350 million of its common stock from July 2016 through May 31, 2019, and more than $500 million prior to that. A year ago, the company announced a share repurchase program of another $400 million.
After reaching a high of 90.23 on February 20, the price of Paychex shares was cut nearly in half, hitting a low of 50.39 on March 23, as panic over the coronavirus hit Wall Street hard. Since then, share price improved to a closing price of 77.78 on Monday, July 6, though after the announcement, shares were sliding in pre-market trading.
This particular earnings report does offer some insight, even though it's backdated to May 31. Some of their business may have taken a hit in June and there may be more going forward, as there's a lag time between companies going bust and formally ending their business relationships. Paychex's fortunes may not be so rosy going forward. The company sees earnings and revenue falling in 2021, a gloomy picture for a perennial high-flier and another negative for the economy. As far as stocks - and, in particular, Paychex - are concerned, their performance will largely be the function of investor sentiment and the level of largesse bestowed upon Wall Street by the Fed in the next round of emergency financing.
Here's another somewhat frightening vision of the future: The only restaurants will be chains like Applebee's, Taco Bell, and McDonald's.
It just could go that way since most mom-and-pop individually-owned restaurants were forced to shut down during the COVID crisis and most of them don't have the financial resources to weather a shutdown for a month or longer. It's already been estimated that more than half the small, local one-location restaurants in America will be permanently out of business by September, if not sooner.
Those that are fortunate enough to stay in business will likely be burdened by loans they were forced to take on due to the government lockdowns. And, as the above-linked article suggests, the chain reaction to other businesses servicing restaurants may be even more severe, affecting delivery services, linen companies, pest-control firms, farmers, and even the local and state taxing authorities, who will take an enormous hit to revenue when hundreds or thousands of sales tax and property tax producers are no longer around.
Under this scenario, companies like Paychex, which cater to small businesses, could see dramatic declines in revenue and profits.
Elsewhere, Argentina's government representatives have apparently sweetened the deal for bond-holders in the ongoing discussions over some $65 billion in debt on which the country recently defaulted. The deadline for a formal agreement has been pushed back (again) to August 4.
Stay liquid.
At the Close, Monday, July 6, 2020:
Dow: 26,287.03, +459.67 (+1.78%)
NASDAQ: 10,433.65, +226.02 (+2.21%)
S&P 500: 3,179.72, +49.71 (+1.59%)
NYSE: 12,160.01, +168.49 (+1.41%)
Sunday, July 5, 2020
WEEKEND WRAP: Second Quarter Ends on High Note, Though Systemic Banking Collapse Is Still Feared
Stocks had a solid week, albeit shorted by a day due to Friday's national holiday, though the recent rally has stalled out over the past month. Despite the sharp rally in equities, prices remain somewhat subdued when put into an historical context.
For instance, since peaking in January of 2018 (13,657.02), the NYSE Composite, the broadest measure of equity valuation, is lower by 12.20 percent, though it did make a new high January 2020 (14,183.26).
The Dow Jones Industrial Average of 30 blue chip stocks followed a similar pattern, peaking at 26,616.71 in January, 2018 - and rallying significantly since then to a high of 29,551.42 - the current price of 25,827.36 shows just how much of a toll the coronavirus and subsequent governmental actions have taken on the industrials.
The NASDAQ and S&P 500 have fared better. Close to its all-time high, the NASDAQ closed out the week at 10,207.63, a massive 25.50% gain from the August 2018 high of 8133.30.
The S&P finished the week at 3,130.01, a measly rise of 6.43% when it reached a then-all-time-high of 2940.91 in September of 2018.
Obviously, being in the riskiest, most prone to speculation stocks has been a winning formula.
Can the winning on the NASDAQ continue without worry of second slump this year? It was less than four months ago when all markets were battered, the NASDAQ dropping to a low of 6641.32 (March 23). Investors with the most extreme risk profiles made fortunes. A gain of 53.70 percent in a span of just three months was the reward for those lucky enough to buy exactly at the bottom and sell right at the top (10221.05) just over a week ago.
With the close of the second quarter, it's time to look ahead, with a focus on the major banking interests in the United States. Bank stocks have generally been pretty well beaten down since the crash in March and most have not recovered to any great extent.
Bank of America (BAC) cratered to 18.08, and closed out this week at just 23.29, not much of a rebound. JP Morgan Chase (JPM) bottomed at 79.03 and closed Thursday at 92.66. Citigroup (C) dipped as low as 35.39. Thursday's close was 50.55. Wells Fargo (WFC), possibly the most vulnerable of the big banking interests, fell as low as 22.53 on May 15, closing out this week at 25.34.
Overarching the activity of the Fed-infused institutions are some fears from the extent of forbearance on all manner of loans, from credit card debt to car loans to mortgages. Many individuals have not made payments on loan balances since April or May and the dearth of revenue has to be taking its toll on the banking balance sheets.
Beyond the revenue decline and potential that people and companies in forbearance (which only delays payments and does not forgive them), the banks have to manage millions of loans (secured and unsecured), some of which will surely end in default, the banks eventually forced to write them down. Thus, it's a safe assumption that the banks will be reporting major loan loss reserves when they report in less than two weeks.
Atop these huge issues is the risk taken in Collateralized Loan Obligations. The banks are out on a very shaky limb there.
How bad is the CLO market? Depends on who you ask. Banks will tell you that they only invest in AAA tranches of CLOs, so their risk is minimized. Companies that are on the receiving end of loans and are placed into tranches - from AAA all the way down to junk, CCC, CC C, C- - give an entirely different perspective.
It cannot be understated that CLOs consist primarily of loans made to companies which have exhausted all other forms of borrowing. They are undeniably the worst credit risks.
There are signs that the CLO market is too big, too unregulated, and risks collapse as oil companies, under pressure from falling crude prices, and retailers, shutting down in droves due to the coronavirus and lockdown edicts in most US states, are leading the lower tranches into default.
As the credit market unwinds (this all takes time... months, years) banks will be under pressure to increase their loan loss reserves, as they showed in first quarter financial reports. Loan loss reserves are likely to be magnitudes higher when second quarter results for the biggest banks are turned out in a few weeks (all the majors, BAC, JPM, GS, MS, WFC, C, from July 13 - July 17).
Another threat to big banks comes from the recent spike in COVID-19 cases in Texas, Florida, California, Arizona, and Georgia.
Keep a close eye on banks this earnings season and beyond. The risk of systemic collapse is growing by the day. If the coronavirus scare increases over the next few months, banking collapse would not be such an unfathomable outcome, no matter how much the Fed manages to prop up the major instituations.
Crude oil, that engine of progress and the grease of economies, continues to bump up against the $40/barrel mark for WTI crude. Reaching a high of $40.72 on June 22nd, WTI approached that apex, cresting at $40.65 on Thursday before settling down to $40.32 on Friday.
Investors in precious metals were witness to one heck of a week as silver blasted through $18.00 a troy ounce hitting a high of $18.40, and gold rocked close to $1800 ($1790), though both were tamped down on futures markets as the week progressed. Gold finished up at $1774.40. Silver closed at $18.02 on Friday, July 2nd.
While the futures (paper) markets continue attempts to suppress price advances in precious metals, the physical market continues to spin higher with no abatement in the size of premiums charged by dealers and acceptable to savers. The most current prices for selected items on eBay (as we have been now tracking for three months) are presented below (shipping, often free, included):
Item: Low / High / Average / Median
1 oz silver coin: 25.95 / 31.95 / 29.01 / 28.99
1 oz silver bar: 24.45 / 33.00 / 29.00 / 29.45
1 oz gold coin: 1,853.82 / 1,976.95 / 1,897.92 / 1,892.50
1 oz gold bar: 1,853.57 / 1,941.42 / 1,869.76 / 1,861.50
Bonds rallied moderately over the four-day week, but only on the long end. Yield on the 10-year note went from 0.64% on the 26th of June to 0.68% on July 2. Over the same period, the 30-year yield advanced from 1.37% to 1.43%. The entire complex steepened from 125 basis points to 130, not a significant move, though the curve is shaped considerably differently than six months ago, and quite a bit steeper. On January 2nd of this year, 1-month bills yielded 1.53%, a massive change from Thursday's 0.13%, and the 30-year bond yielded 2.33%, a range of merely 80 basis points or 0.8% from trough to peak. That's flat.
The current composition of the treasury yield curve can be considered better aligned toward investment, though not by general banking standards. Taken into context, the curve, on July 1, 1994 (a much better period from an economic standpoint) was steep and healthy, with the range from 3-month (4.32%) to 30-year (7.62%) a stunning 330 basis points. The 10-year note was yielding 7.34% at the time. On can only imagine the wreckage that would be brought about today with those kinds of yields.
While savers would be adequately rewarded for frugal habits, corporations and governments would be smashed into oblivion with massively higher debt burdens. This comparison illustrates just how far afield the Fed has gone to preserve fractional reserve lending and the dramatic slowdown in the velocity of money. Considering the current economic climate, it is difficult, if not impossible, to imagine interest rates ever returning to a healthy or normal condition.
The Fed has created money out of thin air in the trillions of dollars and painted themselves into a corner of insanity that ultimately ends with the destruction of capital and currency on a cataclysmic scale.
What's not being reported by American mainstream media is the extent of flooding in China and India caused by recent heavy rains at what is just the beginning of the monsoon season.
This is a story which bears attention. the loss of lives due to flooding and potentialities for malnutrition and starvation due to crop loss - especially rice and rapeseed - is alarming.
On that sour note, this weekend is a wrap.
At the Close, Thursday, July 2, 2020:
Dow: 25,827.36, +92.39 (+0.36%)
NASDAQ: 10,207.63, +53.00 (+0.52%)
S&P 500: 3,130.01, +14.15 (+0.45%)
NYSE : 11,991.52, +89.97 (+0.76%)
For the Week:
Dow: +811.81 (+3.25%)
NASDAQ: +450.41 (+4.62%)
S&P 500: +120.96 (+4.02%)
NYSE: +387.10 (+3.34%)
For instance, since peaking in January of 2018 (13,657.02), the NYSE Composite, the broadest measure of equity valuation, is lower by 12.20 percent, though it did make a new high January 2020 (14,183.26).
The Dow Jones Industrial Average of 30 blue chip stocks followed a similar pattern, peaking at 26,616.71 in January, 2018 - and rallying significantly since then to a high of 29,551.42 - the current price of 25,827.36 shows just how much of a toll the coronavirus and subsequent governmental actions have taken on the industrials.
The NASDAQ and S&P 500 have fared better. Close to its all-time high, the NASDAQ closed out the week at 10,207.63, a massive 25.50% gain from the August 2018 high of 8133.30.
The S&P finished the week at 3,130.01, a measly rise of 6.43% when it reached a then-all-time-high of 2940.91 in September of 2018.
Obviously, being in the riskiest, most prone to speculation stocks has been a winning formula.
Can the winning on the NASDAQ continue without worry of second slump this year? It was less than four months ago when all markets were battered, the NASDAQ dropping to a low of 6641.32 (March 23). Investors with the most extreme risk profiles made fortunes. A gain of 53.70 percent in a span of just three months was the reward for those lucky enough to buy exactly at the bottom and sell right at the top (10221.05) just over a week ago.
With the close of the second quarter, it's time to look ahead, with a focus on the major banking interests in the United States. Bank stocks have generally been pretty well beaten down since the crash in March and most have not recovered to any great extent.
Bank of America (BAC) cratered to 18.08, and closed out this week at just 23.29, not much of a rebound. JP Morgan Chase (JPM) bottomed at 79.03 and closed Thursday at 92.66. Citigroup (C) dipped as low as 35.39. Thursday's close was 50.55. Wells Fargo (WFC), possibly the most vulnerable of the big banking interests, fell as low as 22.53 on May 15, closing out this week at 25.34.
Overarching the activity of the Fed-infused institutions are some fears from the extent of forbearance on all manner of loans, from credit card debt to car loans to mortgages. Many individuals have not made payments on loan balances since April or May and the dearth of revenue has to be taking its toll on the banking balance sheets.
Beyond the revenue decline and potential that people and companies in forbearance (which only delays payments and does not forgive them), the banks have to manage millions of loans (secured and unsecured), some of which will surely end in default, the banks eventually forced to write them down. Thus, it's a safe assumption that the banks will be reporting major loan loss reserves when they report in less than two weeks.
Atop these huge issues is the risk taken in Collateralized Loan Obligations. The banks are out on a very shaky limb there.
How bad is the CLO market? Depends on who you ask. Banks will tell you that they only invest in AAA tranches of CLOs, so their risk is minimized. Companies that are on the receiving end of loans and are placed into tranches - from AAA all the way down to junk, CCC, CC C, C- - give an entirely different perspective.
It cannot be understated that CLOs consist primarily of loans made to companies which have exhausted all other forms of borrowing. They are undeniably the worst credit risks.
There are signs that the CLO market is too big, too unregulated, and risks collapse as oil companies, under pressure from falling crude prices, and retailers, shutting down in droves due to the coronavirus and lockdown edicts in most US states, are leading the lower tranches into default.
As the credit market unwinds (this all takes time... months, years) banks will be under pressure to increase their loan loss reserves, as they showed in first quarter financial reports. Loan loss reserves are likely to be magnitudes higher when second quarter results for the biggest banks are turned out in a few weeks (all the majors, BAC, JPM, GS, MS, WFC, C, from July 13 - July 17).
Another threat to big banks comes from the recent spike in COVID-19 cases in Texas, Florida, California, Arizona, and Georgia.
Bank of America Corp., with $618 billion in deposits across those five states, as per 2019 data; Wells Fargo & Co., with $467 billion; JPMorgan Chase & Co., with $420 billion, and Truist Financial Corp., with $140 billion are the biggest lenders at risk.
Keep a close eye on banks this earnings season and beyond. The risk of systemic collapse is growing by the day. If the coronavirus scare increases over the next few months, banking collapse would not be such an unfathomable outcome, no matter how much the Fed manages to prop up the major instituations.
Crude oil, that engine of progress and the grease of economies, continues to bump up against the $40/barrel mark for WTI crude. Reaching a high of $40.72 on June 22nd, WTI approached that apex, cresting at $40.65 on Thursday before settling down to $40.32 on Friday.
Investors in precious metals were witness to one heck of a week as silver blasted through $18.00 a troy ounce hitting a high of $18.40, and gold rocked close to $1800 ($1790), though both were tamped down on futures markets as the week progressed. Gold finished up at $1774.40. Silver closed at $18.02 on Friday, July 2nd.
While the futures (paper) markets continue attempts to suppress price advances in precious metals, the physical market continues to spin higher with no abatement in the size of premiums charged by dealers and acceptable to savers. The most current prices for selected items on eBay (as we have been now tracking for three months) are presented below (shipping, often free, included):
Item: Low / High / Average / Median
1 oz silver coin: 25.95 / 31.95 / 29.01 / 28.99
1 oz silver bar: 24.45 / 33.00 / 29.00 / 29.45
1 oz gold coin: 1,853.82 / 1,976.95 / 1,897.92 / 1,892.50
1 oz gold bar: 1,853.57 / 1,941.42 / 1,869.76 / 1,861.50
Bonds rallied moderately over the four-day week, but only on the long end. Yield on the 10-year note went from 0.64% on the 26th of June to 0.68% on July 2. Over the same period, the 30-year yield advanced from 1.37% to 1.43%. The entire complex steepened from 125 basis points to 130, not a significant move, though the curve is shaped considerably differently than six months ago, and quite a bit steeper. On January 2nd of this year, 1-month bills yielded 1.53%, a massive change from Thursday's 0.13%, and the 30-year bond yielded 2.33%, a range of merely 80 basis points or 0.8% from trough to peak. That's flat.
The current composition of the treasury yield curve can be considered better aligned toward investment, though not by general banking standards. Taken into context, the curve, on July 1, 1994 (a much better period from an economic standpoint) was steep and healthy, with the range from 3-month (4.32%) to 30-year (7.62%) a stunning 330 basis points. The 10-year note was yielding 7.34% at the time. On can only imagine the wreckage that would be brought about today with those kinds of yields.
While savers would be adequately rewarded for frugal habits, corporations and governments would be smashed into oblivion with massively higher debt burdens. This comparison illustrates just how far afield the Fed has gone to preserve fractional reserve lending and the dramatic slowdown in the velocity of money. Considering the current economic climate, it is difficult, if not impossible, to imagine interest rates ever returning to a healthy or normal condition.
The Fed has created money out of thin air in the trillions of dollars and painted themselves into a corner of insanity that ultimately ends with the destruction of capital and currency on a cataclysmic scale.
What's not being reported by American mainstream media is the extent of flooding in China and India caused by recent heavy rains at what is just the beginning of the monsoon season.
This is a story which bears attention. the loss of lives due to flooding and potentialities for malnutrition and starvation due to crop loss - especially rice and rapeseed - is alarming.
On that sour note, this weekend is a wrap.
At the Close, Thursday, July 2, 2020:
Dow: 25,827.36, +92.39 (+0.36%)
NASDAQ: 10,207.63, +53.00 (+0.52%)
S&P 500: 3,130.01, +14.15 (+0.45%)
NYSE : 11,991.52, +89.97 (+0.76%)
For the Week:
Dow: +811.81 (+3.25%)
NASDAQ: +450.41 (+4.62%)
S&P 500: +120.96 (+4.02%)
NYSE: +387.10 (+3.34%)
Thursday, July 2, 2020
It's Time to Say Good Bye to China
Nearly 50 years ago, then-president Richard M. Nixon opened the door to trade and normalized relations with China.
The exact date was February 21, 1972. Months later, on November 7, 1972, Nixon was re-elected in a landslide victory over Senator George McGovern of South Dakota, winning 60.7 percent of the popular vote and 520 electoral votes, to McGovern’s 37.5 percent and 17, respectively.
On August 8, 1974, Nixon left office as the House of Representatives was preparing to launch an impeachment inquiry for his attempt to cover up and participation in the Watergate scandal.
Nixon's crime in Watergate was heinous enough. Perhaps, revisiting history from our perspective today, he should have been impeached for his China policy. It opened the door for American manufacturers to relocate facilities to the Asian nation, costing millions of Americans their jobs and setting in motion decades of trade imbalances and a long, slow decline of American culture.
It could also be alleged that Nixon's worst crime was his "temporary" closing of the gold window on August 15, 1971, effectively ending the Bretton Woods era. Taken together with his China policy, Nixon set in motion the wreckage of a prosperous middle class in America.
while it's easy to scapegoat Mr. Nixon, it should be pointed out that his policies were mostly not of his making, but those of his advisors and cabinet members, particularly Secretary of State Henry Kissinger, advance man Dewey Clower, founder of the notorious February Group, speechwriter Pat Buchanan, and Donald Rumsfeld, who served as counsellor to the president (1969–73), the United States Permanent Representative to NATO (1973–74), and White House Chief of Staff (1974–75), among others such as George Romney, George Schultz, John Connally, Elliot Richardson, but that's a deep state story for another day.
As of 2019, over $560 billion worth of products come from China. Everything from electric blankets to video game consoles, from cooking appliances to baby carriages are made almost exclusively in China. Proctor & Gamble estimates that Chinese materials impact 17,600 different finished products.
Decades of cheap, sub-standard manufactured products from China have eroded the quality of life in America. dealing with the communists allowed the propagation of Wal-Marts across the country, wiping out hundreds of thousands, if not millions, of small businesses that dotted the business landscape of both urban and rural America. Our economy is now almost fully dependent on imports from China and spending by consumers.
Corporations don't make much of anything in America any more. The mainstream media, flush with scary stories about COVID-19, the second wave, lockdowns, protesting in the streets, and the cultural revolution of Black Lives Matter and ANTIFA, will almost certainly have a field day if trade relations with China sour, which they already have, though they're too busy with all the other nonsense to notice.
American dissatisfaction with China is reaching catastrophic proportions. According to a polls conducted by the Gallup organization, 67 percent of Americans have a negative view of China. 87 and 89 percent of those polled view China's military and economic strengths, respectively, as critical or important threats to America. 62 percent believe China's trade policies toward the US are unfair, and 86 percent are either somewhat concerned or very concerned about China's trade policies. And these polls were taken before the coronavirus, of which 77% of people polled by Harris believe originated in China [PDF], spread disease and death around the world.
Aside from the lying, spying, stealing of state secrets, knock offs and pirating of American products, pet food that kills dogs and cats, substandard plywood, concrete and other building materials like nails that bend on impact and screws that break in half, forays into the South China Sea and Africa, aggressive attitude toward Hong Kong and Taiwan, defective coffee makers, blenders and a slew of household and consumer products, China is just fine as a trading partner.
The United States should, instead of appeasing them on trade as many former presidents have, take President Trump's approach to the extreme and just sever relations with them altogether. While such a policy would likely result in many empty shelves in WalMart and Target stores, it might just be enough of a spark to ignite a fire under the dormant manufacturing base in the United States of America and create millions of new jobs in a restructured economy.
The world has been ravaged by a Chinese scourge for nearly 50 years. It's time to turn the tables on the Communists and banish them rather than bless them and promote them, as the BLM and ANTIFA protesters do.
Markets will be closed on Friday, in observance of Independence Day. Enjoy the holiday by buying American-made goods, if you can find any.
At the Close, Wednesday, July 1, 2020:
Dow: 25,734.97; -77.91 (-0.30%)
NASDAQ: 10,154.63, +95.86 (+0.95%)
S&P 500: 3,115.86, +15.57 (+0.50%)
NYSE: 11,901.55, +7.77 (+0.07%)
The exact date was February 21, 1972. Months later, on November 7, 1972, Nixon was re-elected in a landslide victory over Senator George McGovern of South Dakota, winning 60.7 percent of the popular vote and 520 electoral votes, to McGovern’s 37.5 percent and 17, respectively.
On August 8, 1974, Nixon left office as the House of Representatives was preparing to launch an impeachment inquiry for his attempt to cover up and participation in the Watergate scandal.
Nixon's crime in Watergate was heinous enough. Perhaps, revisiting history from our perspective today, he should have been impeached for his China policy. It opened the door for American manufacturers to relocate facilities to the Asian nation, costing millions of Americans their jobs and setting in motion decades of trade imbalances and a long, slow decline of American culture.
It could also be alleged that Nixon's worst crime was his "temporary" closing of the gold window on August 15, 1971, effectively ending the Bretton Woods era. Taken together with his China policy, Nixon set in motion the wreckage of a prosperous middle class in America.
while it's easy to scapegoat Mr. Nixon, it should be pointed out that his policies were mostly not of his making, but those of his advisors and cabinet members, particularly Secretary of State Henry Kissinger, advance man Dewey Clower, founder of the notorious February Group, speechwriter Pat Buchanan, and Donald Rumsfeld, who served as counsellor to the president (1969–73), the United States Permanent Representative to NATO (1973–74), and White House Chief of Staff (1974–75), among others such as George Romney, George Schultz, John Connally, Elliot Richardson, but that's a deep state story for another day.
As of 2019, over $560 billion worth of products come from China. Everything from electric blankets to video game consoles, from cooking appliances to baby carriages are made almost exclusively in China. Proctor & Gamble estimates that Chinese materials impact 17,600 different finished products.
Decades of cheap, sub-standard manufactured products from China have eroded the quality of life in America. dealing with the communists allowed the propagation of Wal-Marts across the country, wiping out hundreds of thousands, if not millions, of small businesses that dotted the business landscape of both urban and rural America. Our economy is now almost fully dependent on imports from China and spending by consumers.
Corporations don't make much of anything in America any more. The mainstream media, flush with scary stories about COVID-19, the second wave, lockdowns, protesting in the streets, and the cultural revolution of Black Lives Matter and ANTIFA, will almost certainly have a field day if trade relations with China sour, which they already have, though they're too busy with all the other nonsense to notice.
American dissatisfaction with China is reaching catastrophic proportions. According to a polls conducted by the Gallup organization, 67 percent of Americans have a negative view of China. 87 and 89 percent of those polled view China's military and economic strengths, respectively, as critical or important threats to America. 62 percent believe China's trade policies toward the US are unfair, and 86 percent are either somewhat concerned or very concerned about China's trade policies. And these polls were taken before the coronavirus, of which 77% of people polled by Harris believe originated in China [PDF], spread disease and death around the world.
Aside from the lying, spying, stealing of state secrets, knock offs and pirating of American products, pet food that kills dogs and cats, substandard plywood, concrete and other building materials like nails that bend on impact and screws that break in half, forays into the South China Sea and Africa, aggressive attitude toward Hong Kong and Taiwan, defective coffee makers, blenders and a slew of household and consumer products, China is just fine as a trading partner.
The United States should, instead of appeasing them on trade as many former presidents have, take President Trump's approach to the extreme and just sever relations with them altogether. While such a policy would likely result in many empty shelves in WalMart and Target stores, it might just be enough of a spark to ignite a fire under the dormant manufacturing base in the United States of America and create millions of new jobs in a restructured economy.
The world has been ravaged by a Chinese scourge for nearly 50 years. It's time to turn the tables on the Communists and banish them rather than bless them and promote them, as the BLM and ANTIFA protesters do.
Markets will be closed on Friday, in observance of Independence Day. Enjoy the holiday by buying American-made goods, if you can find any.
At the Close, Wednesday, July 1, 2020:
Dow: 25,734.97; -77.91 (-0.30%)
NASDAQ: 10,154.63, +95.86 (+0.95%)
S&P 500: 3,115.86, +15.57 (+0.50%)
NYSE: 11,901.55, +7.77 (+0.07%)
Wednesday, July 1, 2020
Credit World May Become A Battlefield If FICO and Square Butt Heads; Silver on the Move; ADP Fairy Tales
A couple of stories from the world of personal credit are noteworthy as the world enters the third quarter of 2020 hoping for improvement but fearing a repeat of the second quarter from the same enemy which ran roughshod over the world economy.
It's not the virus that people fear, but government response to it in terms of restricted mobility, business operations, and general closures of everything from schools and churches to bars and hair salons.
While the planet and government managers struggle with the virus and their chances in the upcoming US elections in November, credit issues are popping up like daffodils in Springtime. Huge numbers of Americans are foregoing rent and mortgage payments, citing unemployment as the main cause for a diminished cash flow, and delinquencies are piling up not only on mortgages (which are vitally important), but on car loans and leases, student debt, credit cards, and personal loans.
It's because of these issues, or perhaps in spite of them, that FICO (Fair Isaac Corporation) wants to rate your resilience and ability to pay back borrowed money in a recession or economic downturn. The company and its affiliate credit scorekeepers - Experian, TransUnion and Equifax - are looking back at credit histories from the GFC in 2007-09 for hints of riskiness in borrowers.
Their findings, which won't be relevant for at least a few more months, could affect how consumers are judged when applying for any kind of credit, from mortgages to car loans. If economic conditions remain below par, many people with poor resilience scores could find themselves out of luck getting credit.
Countering FICO's foray into past performance of borrowers, Chime continues to innovate in the banking and credit space with the launch of the Chime Credit Builder Visa Credit Card.
Actually a debit card that works like a credit card, users can transfer funds from a secure Chime account to a Visa card, and use that money to charge anything, including everyday items like food, gas, clothing or general expenses. The charges are paid by the card automatically, and the results reported to the credit bureaus. The goal is to improve credit scores for mainly younger folks, who favor debit cards over credit, but who need to establish or improve their credit history.
If it sounds like cheating, it very well may be. This is reporting of purchases made with essentially a debit card being reported as a credit card. The credit bureaus are likely to balk at this methodology. A clash between the old standard bureaus and the upstart Chime might make for some interesting developments in how credit and individual risk are measured down the road.
Tuesday's hands-down big winner was silver, which rocketed up by more than two percent in the futures space, vaulting over the psychologically-challenging $18 mark and holding around $18.20. Gold's little sister has a lot of catching up to do and if this price maintains, should signal that a run up to resistance in the $20-21 range is imminent. Correlated closely to the S&P index (for God only knows what reason), if stocks falter and silver holds or goes even higher, that would qualify as a major development. Keep eyes peeled on that space.
Stocks continued their rally from Monday into Tuesday, which was the final day of the month and of the second quarter, an important milestone, since GDP for the quarter - heavily affected by the coronavirus and state-by-state lockdowns and business closures - is expected to check in with a very negative number on a scale likely never seen before. Estimates for second quarter GDP range between -25% to -52%.
Current stock valuations seem to be suggesting that investors are leaning toward the upper end of that range. A decline of 30-35% might actually be seen as a positive for markets because it will be viewed as a one-off event followed by a rapid recovery, though the jury is still out on whether economic recovery will look like a "V", "W", or an "L".
Any view of the stock market indices over the past five months clearly show a "V" shape, with stocks declining and rising at the same frenetic pace. The recovery pattern for stocks can hardly be taken as definitive by any measure of economic activity. Stocks were skyrocketing off their lows as millions of people were losing their jobs, the government and Federal Reserve exercising emergency measures, and the general economy entering a recession.
A "W" pattern goes along with the "second wave" theory of the virus, already being engineered by increased testing and renewed calls for shutdowns, lockdowns, face masks, social distancing and all the assorted recommendations which were successful only in wrecking the Main Street small business economy.
The "L" pattern is the one most despised by money managers, banking executives, and financial central planners because it offers no realistic hope for the immediate future. The "L" concept implies that the economy falls and stays down for an extended period. Like just about everything else the experts at the biggest banks and financial institutions predict, contrarian view has the slow recovery "L" pattern front of mind and it is actually the most likely pattern - not for stocks or any other asset classes - for the general economy in terms of GDP, personal income, and employment.
Finally, queueing the start of the third quarter in the typical doublespeak manner, ADP's June Employment Report showed a gain of 2,369,000 jobs in the non-farm private sector. This follows a decline of 2,760,000 in May, with June just about covering all those job losses. ADP saw 19.5 million people lose their jobs in April, another 2.8 million lost jobs in May (which has now been revised to +3.065mm!). It's almost as if many of those 20 million people filing continuing unemployment claims don't exist, which is fine, since we're all living in bizarro-world now.
At the Close, Tuesday, June 30, 2020:
Dow: 25,812.88, +217.08 (+0.85%)
NASDAQ: 10,058.77, +184.61 (+1.87%)
S&P 500: 3,100.29, +47.05 (+1.54%)
NYSE: 11,893.78, +116.69 (+0.99%)
It's not the virus that people fear, but government response to it in terms of restricted mobility, business operations, and general closures of everything from schools and churches to bars and hair salons.
While the planet and government managers struggle with the virus and their chances in the upcoming US elections in November, credit issues are popping up like daffodils in Springtime. Huge numbers of Americans are foregoing rent and mortgage payments, citing unemployment as the main cause for a diminished cash flow, and delinquencies are piling up not only on mortgages (which are vitally important), but on car loans and leases, student debt, credit cards, and personal loans.
It's because of these issues, or perhaps in spite of them, that FICO (Fair Isaac Corporation) wants to rate your resilience and ability to pay back borrowed money in a recession or economic downturn. The company and its affiliate credit scorekeepers - Experian, TransUnion and Equifax - are looking back at credit histories from the GFC in 2007-09 for hints of riskiness in borrowers.
Their findings, which won't be relevant for at least a few more months, could affect how consumers are judged when applying for any kind of credit, from mortgages to car loans. If economic conditions remain below par, many people with poor resilience scores could find themselves out of luck getting credit.
Countering FICO's foray into past performance of borrowers, Chime continues to innovate in the banking and credit space with the launch of the Chime Credit Builder Visa Credit Card.
Actually a debit card that works like a credit card, users can transfer funds from a secure Chime account to a Visa card, and use that money to charge anything, including everyday items like food, gas, clothing or general expenses. The charges are paid by the card automatically, and the results reported to the credit bureaus. The goal is to improve credit scores for mainly younger folks, who favor debit cards over credit, but who need to establish or improve their credit history.
If it sounds like cheating, it very well may be. This is reporting of purchases made with essentially a debit card being reported as a credit card. The credit bureaus are likely to balk at this methodology. A clash between the old standard bureaus and the upstart Chime might make for some interesting developments in how credit and individual risk are measured down the road.
Tuesday's hands-down big winner was silver, which rocketed up by more than two percent in the futures space, vaulting over the psychologically-challenging $18 mark and holding around $18.20. Gold's little sister has a lot of catching up to do and if this price maintains, should signal that a run up to resistance in the $20-21 range is imminent. Correlated closely to the S&P index (for God only knows what reason), if stocks falter and silver holds or goes even higher, that would qualify as a major development. Keep eyes peeled on that space.
Stocks continued their rally from Monday into Tuesday, which was the final day of the month and of the second quarter, an important milestone, since GDP for the quarter - heavily affected by the coronavirus and state-by-state lockdowns and business closures - is expected to check in with a very negative number on a scale likely never seen before. Estimates for second quarter GDP range between -25% to -52%.
Current stock valuations seem to be suggesting that investors are leaning toward the upper end of that range. A decline of 30-35% might actually be seen as a positive for markets because it will be viewed as a one-off event followed by a rapid recovery, though the jury is still out on whether economic recovery will look like a "V", "W", or an "L".
Any view of the stock market indices over the past five months clearly show a "V" shape, with stocks declining and rising at the same frenetic pace. The recovery pattern for stocks can hardly be taken as definitive by any measure of economic activity. Stocks were skyrocketing off their lows as millions of people were losing their jobs, the government and Federal Reserve exercising emergency measures, and the general economy entering a recession.
A "W" pattern goes along with the "second wave" theory of the virus, already being engineered by increased testing and renewed calls for shutdowns, lockdowns, face masks, social distancing and all the assorted recommendations which were successful only in wrecking the Main Street small business economy.
The "L" pattern is the one most despised by money managers, banking executives, and financial central planners because it offers no realistic hope for the immediate future. The "L" concept implies that the economy falls and stays down for an extended period. Like just about everything else the experts at the biggest banks and financial institutions predict, contrarian view has the slow recovery "L" pattern front of mind and it is actually the most likely pattern - not for stocks or any other asset classes - for the general economy in terms of GDP, personal income, and employment.
Finally, queueing the start of the third quarter in the typical doublespeak manner, ADP's June Employment Report showed a gain of 2,369,000 jobs in the non-farm private sector. This follows a decline of 2,760,000 in May, with June just about covering all those job losses. ADP saw 19.5 million people lose their jobs in April, another 2.8 million lost jobs in May (which has now been revised to +3.065mm!). It's almost as if many of those 20 million people filing continuing unemployment claims don't exist, which is fine, since we're all living in bizarro-world now.
At the Close, Tuesday, June 30, 2020:
Dow: 25,812.88, +217.08 (+0.85%)
NASDAQ: 10,058.77, +184.61 (+1.87%)
S&P 500: 3,100.29, +47.05 (+1.54%)
NYSE: 11,893.78, +116.69 (+0.99%)
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